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How we Invest

The Case for Asset Allocation

How we Invest

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Asset Allocation

Not all asset classes appreciate at the same rate. Some have made you very little money for the past ten years, even taking into account dividends, while others have returned multiples of the original investment as shown below.

Getting Asset Allocation right can make a big difference

Total Return in UK Sterling terms 30/06/04 to 30/06/14

Source: Thomson Reuters. 

The chart above shows the total returns from a variety of markets or asset classes which would  have accrued to a sterling investor over the past ten years.  This underlines the importance of taking currencies into consideration when making asset decisions.

In general, there is no guaranteed way to choose the asset class which is going to produce the  best returns over the coming years, but we believe that the younger, Pacific-centric economies  are likely to grow further and faster than the old, Atlantic-centric ones. There is a young and  dynamic population of over 2,500 million in this region who will eat more, consume more  manufactured goods and use more energy. They will want a steadily-rising standard of living and will work hard to earn it. We believe that these markets are the markets of the future and,  over the long-term, our global asset allocation approach favours the Pacific-centric markets,  certain commodities and global property.

Whilst the chart above enables one to understand intuitively the importance of the asset class decision – it doesn’t really matter which column is which, the crucial point is that the outcomes for each were very different proving that asset choices in a portfolio would have made a huge difference to investment returns over the ten year period.

Studies demonstrating the importance of Asset Allocation

Authors Date Data Source % variability of return from strategic asset allocation %level of long-term return from strategic asset allocation
Brinson, Hood & Beebower 1986 91 Large US Balanced pension funds 1974-1983

93.6 %

Brinson, Singer & Beebower 1991 82 Large US pension Funds 1977-1987 91.5 % 101%
Blake Lehman & Timmerman 1999 306 UK pension funds 1986-1994 96% N/A
Ibbotson & Kaplan 2000 58 US balanced pension funds & 94 mutual pension funds 1987-1998 pension funds 88%, mutual funds 81.4 % pension funds 99%, mutual funds 104%
Drobetz & Kohler 2002 51 German & Swiss pension funds 1995-2001 82.9 % 134%

Many have approached this question from an academic angle and many studies have been carried out and published on the subject over the past 30 years.  Above is a selection of the findings from studies covering a range of underlying geographies and fund types.

The results are unequivocal and clearly demonstrate the importance of asset allocation.  It may seem strange to see that Asset Allocation has accounted for more than 100% of long-term return in most cases, but this reflects the impact of the higher underlying costs associated with the ‘active’ or stock-picking element of the investment decision which detract from long-term returns.

Asset Allocation Principle

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